The Real Interest Rate as a Control Variable in the Open Economy
Carlos Esteban Posada, Liz Londoño-Sierra
TLDR
This paper models the real interest rate as a control variable in an open economy, finding it's determined by utility discount rates and productivity expectations.
Key contributions
- Models the real interest rate as a control variable in an open market economy.
- Identifies future utility discount rate as a key determinant of the real interest rate.
- Shows expectations of future multifactor productivity also determine the interest rate.
- Finds increased productivity expectations lead to higher interest rates and wages.
Why it matters
This paper offers a novel perspective by treating the real interest rate as a control variable, providing new insights into its determinants and effects in an open economy. Its findings, consistent with established models, have implications for economic policy and forecasting.
Original Abstract
This paper addresses the structure and dynamics of an open market economy and its relations with the real interest rate. In this respect, the paper is situated within a broad conventional literature. However, it departs from the standard approach to the interest rate by treating it as a control variable. Even so, the analysis concludes that the two main determinants of the interest rate are the future utility discount rate and expectations regarding future multifactor productivity (labor efficiency). Furthermore, increases in such expectations lead to increases in both the interest rate and wages. These results are consistent with to those obtained with the Cass, Koopmans, Ramsey model.
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